3 i6 THE GENERAL THEORY OF EMPLOYMENT bk. VI

organised investment markets, under the influence ofpurchasers largely ignorant of what they are buyingand of speculators who are more concerned with fore-casting the next shift of market sentiment than with areasonable estimate of the future yield of capital-assets,that, when disillusion falls upon an over-optimistic andover-bought market, it should fall with sudden and evencatastrophic force . 1 Moreover, the dismay and un-certainty as to the future which accompanies a collapsein the marginal efficiency of capital naturally precipi-tates a sharp increase in liquidity-preference—andhence a rise in the rate of interest. Thus the fact thata collapse in the marginal efficiency of capital tends tobe associated with a rise in the rate of interest mayseriously aggravate the decline in investment. But theessence of the situation is to be found, nevertheless, inthe collapse in the marginal efficiency of capital, par-ticularly in the case of those types of capital whichhave been contributing most to the previous phase ofheavy new investment. Liquidity-preference, exceptthose manifestations of it which are associated with in-creasing trade and speculation, does not increase untilafter the collapse in the marginal efficiency of capital.

It is this, indeed, which renders the slump so in-tractable. Later on, a decline in the rate of interestwill be a great aid to recovery and, probably, a necessarycondition of it. But, for the moment, the collapse inthe marginal efficiency of capital may be so completethat no practicable reduction in the rate of interest willbe enough. If a reduction in the rate of interest wascapable of proving an effective remedy by itself, it mightbe possible to achieve a recovery without the elapse ofany considerable interval of time and by means moreor less directly under the control of the monetary

1 I have shown above (Chapter 1z) that, although the private investor isseldom himself directly responsible for new investment, nevertheless theentrepreneurs, who are directly responsible, will find it financially advan-tageous, and often unavoidable, to fall in with the ideas of the market, eventhough they themselves are better instructed.